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Last week, the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) of Brazil published the initial tender protocol and draft concession contract for its 14th licensing round. In the context of relative stability in the oil price and a rebounding economy, hopes were high that this would mark an upturn in investments in this important sector of the economy.

Coincidentally, the Supreme Court opened an investigation into the Brazilian president on allegations of corruption and obstruction of justice on the same day. President Michel Temer, who assumed the office when his predecessor was impeached last year, has refused to resign despite the existence of apparently damning audio recordings, but he may yet face the same fate as his predecessor. In any case, as erstwhile allies abandon him, the government will find it difficult to push through important structural reforms and there are worries about the impact of this political uncertainty on the upcoming oil and gas bid rounds.

The initial tender protocol and draft concession contracts have been published as drafts, subject to comments from interested parties and public consultation. Following that process, the final tender protocol should be published on 20 June, with a deadline of 4 August for expressions of interest. ANP plans to hold the auction on 27 September. The 14th round is the first auction of deep-water blocks in Brazil since the unsatisfactory 13th licensing round in October 2015, which only awarded 37 of 266 blocks on offer.

This tender protocol for the 14th round contains details of the 287 blocks on offer, in 9 sedimentary basins; offshore (Sergipe-Alagoas, Espírito Santo, Campos, Santos and Pelotas); onshore frontier (Paraná and Parnaíba); and mature onshore (Potiguar, Recôncavo, Sergipe-Alagoas, and Espírito Santo). A number of these blocks are leftovers from the 13th round, but most have had minimum signing bonuses reduced, some by more than R$ 30 million.

The protocol for the 14th licensing round sets out pre-qualification requirements, bid procedures and the main commercial terms of the concession contracts on offer. Pre-qualification documents are required to be submitted by 4 August 2017, and, where a successful bidder is a non-Brazilian entity, it will be required to incorporate or designate a Brazilian subsidiary with its main office and administration in Brazil to hold the concession.

Pre-qualified companies may bid individually or in consortia. All consortia must consist entirely of pre-qualified companies, with at least one pre-qualified operator holding at least a 30% interest and each consortium member holding at least 5%. Each bidding company and each member of a bidding consortium must pay a participation fee which will give them access to data packages covering the relevant blocks. The participation fees for this 14th round vary from R$35,500 to R$194,500, according to the basin.

With the most coveted acreage to be offered on production sharing terms in separate bid rounds later this year, Brazil has proposed more favorable concession terms for this round, including simplified and lower local content requirements. The main differences from previous rounds relate to (i) the exploration phase; (ii) local content; (iii) royalty rates; and (iv) the financial capability of the bidding companies.

The term of the concession is still up to 35 years, with an exploration phase of five to eight years and a development and production stage of 27 years. The difference from previous rounds is that the exploration phase is no longer divided into two periods. In this 14th Round, the exploration phase shall be a single period that varies from 5 to 7 years, according to the area, and may be extended in certain circumstances, as established in the Concession Agreement.

Bids will be assessed by the ANP according to the signature bonus (80%) and the mandatory exploration programme (20%). Local content commitments are no longer a bid criterium and, as provided in the Brazil's National Energy Policy Council (CNPE) Resolution n.07/2017, the minimum local content for this round shall be the following:

Onshore Blocks

Exploration = 50%

Development = 50%

Offshore Blocks

Exploration = 18%

Development

Well construction = 25%

Subsea systems = 40%

Production platforms = 25%

Royalties may be levied at 5%, 7.5% or 10%, depending on the block, and fields that produce large volumes may also be required to pay the so-called "special participation". The royalty rate on those high-producing fields will always be 10%. The ANP may also agree to reduce royalty rates to as low as 5% on incremental production, when agreeing to extend the term of a concession in exchange for new investments.

As in previous licensing rounds, the ultimate parent company of a proposed concession holder must demonstrate its technical and financial capability. Successful applicants may qualify as an ‘A’, ‘B’ or ‘C’ operator or a non-operator depending on their level of technical experience and their net equity position. The ANP has amended the financial capability requirements for bidding companies. On one hand, the required minimum net equity of the operators has been increased. The new values are: (a) R$ 152 million for Operator A (including ultra-deep water and deepwater blocks); (b) R$ 68 million for Operator B (including shallow blocks); and (c) R$ 5.5 million for Operator C (onshore only). On the other hand, there has been a reduction in the net equity requirements for non-operators, which is now 25% (instead of 50%) of the required minimum net equity for the block operator.

The more investor-friendly terms of this round have been well received by the industry, and the variety of blocks on offer present opportunities for a range of different exploration and production companies. However, there is concern that renewed political uncertainty could have a detrimental effect. Executives and government officials are now questioning whether there is enough political stability to pass the resolutions needed to ensure the success of upcoming bid rounds, especially for renewal of the special industry tax regime, REPETRO.

Considering the importance of oil and gas investment to the Brazilian economy, it is to be hoped that the timetable and terms for upcoming bid rounds will be maintained, irrespective of potential changes in the government. Oil companies are no strangers to political risk and need to take a long term view of their investments, so it may be that these bid rounds are less impacted by recent events than some other sectors of the economy.